The Impact of Regulation Fair Disclosure: Trading Costs and Information Asymmetry

34 Pages Posted: 5 Oct 2001

See all articles by Kumar Venkataraman

Kumar Venkataraman

Southern Methodist University (SMU) - Finance Department

Rex Thompson

affiliation not provided to SSRN

Venkat Eleswarapu

Chicago Equity Partners

Multiple version iconThere are 2 versions of this paper

Date Written: October 2001

Abstract

Recently, the Securities and Exchange Commission (SEC) passed a new rule, known as Regulation Fair Disclosure (Reg. FD), that prohibits selective disclosure of material information to analysts and other investment professionals. Both proponents and critics, in emphasizing different aspects of the information environment, have offered logical support for their views. Our study is designed to clarify the empirical impact of this new regulation on trading costs and, by inference, on the degree of information asymmetry extant in the equity markets.

In brief, we find no evidence to suggest that Reg. FD has caused asymmetry to increase. On the contrary, our measures of trading costs suggest that the risk of adverse selection during information events has reduced significantly after the introduction of Reg. FD. In addition, we find some evidence that the SEC appears to be successful in accomplishing its objective of preventing select investors from gaining preferential access to material information before information events. In a cross-section, our analysis suggests that the more illiquid firms obtain, relatively, a greater benefit from this reduction in trading costs.

Finally, our analysis of market model residuals and announcement period return prediction errors provides no support for the contention that Reg. FD increases return volatility and exaggerates price reactions to announcements. If anything, the data suggest that information flow around mandatory announcements has decreased but overall information flow is unchanged.

Keywords: Regulation Fair Disclosure, Reg. FD, Trading Costs, Information Asymmetry, SEC

JEL Classification: G38, G14, G18

Suggested Citation

Venkataraman, Kumar and Thompson, Rex W. and Eleswarapu, Venkat R., The Impact of Regulation Fair Disclosure: Trading Costs and Information Asymmetry (October 2001). Available at SSRN: https://ssrn.com/abstract=286095 or http://dx.doi.org/10.2139/ssrn.286095

Kumar Venkataraman (Contact Author)

Southern Methodist University (SMU) - Finance Department ( email )

United States
214-768-7005 (Phone)
214-768-4099 (Fax)

HOME PAGE: http://people.smu.edu/kumar/

Rex W. Thompson

affiliation not provided to SSRN

Venkat R. Eleswarapu

Chicago Equity Partners ( email )

United States
312 629 8628 (Phone)

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